If you are anything like my father was, you’re not a fan of insurance (or at least insurance salesmen). That said, part of any retirement review should include some discussion around insurance.
Most people think of permanent life insurance as money paid when someone dies. They know it’s a great solution for paying a tax liability at death, providing gifts for loved ones or charities.
Tax-exempt investing
If you hold a large percentage of interest-bearing bonds and GICs in your non-registered investment portfolio, you will be very familiar with the one, two punch of high taxes and inflation. Between uncomfortably low GIC rates, your interest income being fully taxable at your marginal rate, and inflation slowly eroding away your purchasing power, you’re almost better off putting these funds under your mattress.
A potentially interesting solution is tax-exempt insurance, where any income generated by your assets can accumulate on a tax-deferred basis, as they do in a registered plan. And you can access the funds by taking out tax-free loans using the insurance policy as collateral.
Because of these advantages, some high-net-worth farmers have come to regard tax-exempt insurance not so much as insurance, but rather as a third investment pool, complementing their registered retirement plans and non-registered investment portfolios. However, there is also an insurance benefit to tax-exempt insurance – a completely tax-free death benefit that your beneficiaries can use to cover estate taxes, or for any other purpose, such as creating a family trust or a charitable legacy.
What about retirement
income?
People typically think of Registered Retirement Savings Plans and other registered plans when they think of retirement. Many rely on these registered plans as their main source of income. The problem is that the amounts you can contribute to these plans are limited – which may leave you short of retirement income.
Using tax-exempt insurance as a strategy provides the potential for tax-deferred accumulation of funds in the form of an exempt life insurance policy, and tax-free access to those funds in the future by form of cash, policy loan or collateral loan. What’s more, you are free to contribute as much as you desire based on the amount of insurance coverage purchased. Once you have left the policy to grow for a significant period of time you can access the funds for income.
Upon death, the loan is automatically repaid and the remaining tax-free death benefit is paid to your beneficiaries.
Considerations
I always recommend careful consideration of any insurance solution, as they are hard to unwind, but they should be at least discussed with your investment council and accountant.
James Kinkaid is an Investment Advisors with RBC Dominion Securities Inc.* He can be reached at: tel: 1-800-267-7680 or 613-564-4646, e-mail: james.kinkaid@rbc.com. This article is not intended as nor does it constitute investment, tax or legal advice. The information contained in this article has been compiled from sources believed to be reliable, but no representations or warranty, express or implied, are made by RBC DS or any other person as to its accuracy, completeness or correctness.
From the Archives:
News, May 2011
